The Dangerous Decision to “Bitcoinize” the Salvadoran Economy

In a press conference in English, the controversial president of El Salvador, Nayib Bukele, announced that the cryptocurrency BITCOIN will circulate as the official currency of that country [1], becoming the first nation in the world to recognize and adopt this cryptoasset as an official currency.

While the decision at first glance seems to be very much in line with the historical moment, it hides many associated risks in the background.

Why is it so dangerous and problematic to introduce BITCOIN as an official currency?

 By: Gabriel E. Levy B.

In 2008, Satoshi Nakamoto[2], an enigmatic character credited as the father of BITCOIN, published an article describing a novel and complex computer system, based on P2P (Point-to-Point) technology, designed for the exchange of digital values, through the use of highly complex and secure encrypted codes, through a distributed network and without the requirement of a server or central bank.

Subsequently, Bitcoin software was officially launched for the first time in 2009, thus creating the network of the same name and consequently the first units under the concept of digital currency [3].

Unlike physical currencies, such as the dollar, which is fiat money (i.e. its value depends only on trust) issued by the Federal Reserve, supported by debt creation, distributed through commercial banks and printed on paper, bitcoin uses a proof-of-work system to simulate the “mining” of raw materials, like a virtual production system.

In theory, the price of bitcoins is close to the marginal cost of production of the same virtual mining (electricity, software, hardware, labor, etc.), whose scarcity is not “natural” for obvious reasons, but generated through a mathematical algorithm [4].

This led economist George Selgin to call the value of bitcoin a “synthetic commodity“, but which behaves just like any tangible good in the case of market price by virtue of appreciation and depreciation in the supply and demand process.

Bukele’s decision

For the image and public relations of the alternative Millennial president of El Salvador, Nayib Bukele, the adoption of Bitcoin as an official currency is very positive, since it produces in the public opinion the feeling of an adequate update to the new times for the Salvadoran economy, projecting himself, moreover, as a young RockStar of the GEEK world, a balm that fits very well with his relaxed form of government based on social media and the immediacy of the hyperconnected world [5].

After the recent past elections, Nayib Bukele was left with control of the parliamentary majorities, which is why making such radical decisions is very easy for him to implement without opposition in the legislature [6].

The risk that Bitcoin hides

One of the reasons why bitcoin is highly appreciated, even without a fiduciary backing, is that in recent years it has become the preferred means of payment in the dark web, becoming the financial support for a number of criminal activities that occur in cyberspace, especially the so-called “ransomware” or “digital kidnapping”, a headache that has paralyzed governments, clinics, schools, companies, power plants.

The most recent episode of ransomware was the blockade of one of the most important oil pipelines in the United States, which left several states without fuel for several days, forcing its owners to pay a millionaire sum of money for the ransom [7].

Taking into account that the number of Bitcoins circulating in the market is limited by the structure of the system itself through a distributed model that supports it and by the mining mechanism that underlies it, as cybercriminals demand it as payment for ransom, it begins to be demanded and, given the shortage in the available supply, its value begins to grow, which has generated that from 20 cents on the dollar, which was the initial price of 1 Bitcoin, it is now worth an average of 40 thousand dollars per unit. However, in the absence of an issuing central bank, its value fluctuates greatly with each episode in the framework of global markets.

Precisely for this reason, only a few weeks ago, the National Internet Finance Association of China (NIFA), the China Banking Association (CBA) and the China Payments and Clearing Association, by orders of the central government, took the decision to expressly prohibit any type of transaction with cryptocurrencies, precisely because it is a currency without any backing, based on crime and crime as the main guarantee of its value [8].

“Recently, crypto currency prices have skyrocketed and plummeted, and speculative trading of cryptocurrency has rebounded, seriously infringing on the safety of people’s property and disrupting the normal economic and financial order,” statement of the Chinese Government through the financial associations [9]

The three associations also highlighted the risks associated with these virtual currencies claiming that “they are not backed by real value”, so their prices are easily manipulated and commercial contracts are not protected by the country’s law.

Laundry: “El Salvador”

Possibly, Bukele’s government decision could trigger an unprecedented migration of criminal capital to the small Central American country, especially because the nation’s central bank does not issue its own currency, but the dollar is the official circulating currency[10] and being El Salvador, the only country that would not exercise legal restrictions on the circulation of BITCOIN, it could become “The Laundry” of the world, through a perfect equation for the sanitation of global criminal capital.

When the cryptocurrency begins to circulate without restrictions throughout the national economy, any criminal would find a way to dilute and atomize their criminal assets within this market, converting code to dollars in a matter of seconds, closing the circle of impunity, since the BITCOIN operation is decentralized, it is almost impossible to trace.

Some insurance companies and intelligence agencies of first world countries have managed to identify cybercriminals when they try to change large sums of Bitcoin into money, something they would no longer have to do, for example, if they convert their cryptocurrencies into dollars, through thousands of small operations within the Salvadoran economy.

It is also important to remember that this country is one of the historical epicenters of drug trafficking to the United States and that groups of outlaw gangs known as “Maras” coexist in this nation, which added to the potential flow of illegal capital, could turn this territory into a social and economic time bomb.

An energy problem

The criminal activities hidden behind cryptocurrencies are not the only problem facing Bukele’s decision.

The process of “mining” any cryptocurrency, but especially BITCOIN, consumes large amounts of energy, since it requires many computers working in the encryption process, which globally represents about 129 TWh [11] (equivalent to 0.6% of the world’s energy consumption).

Aware of the high energy demand triggered by the mining of all transactions that will occur from now on in El Salvador, President Bukele ordered the creation of new GEOTERMIC stations (i.e. energy production from the heat produced by the abundant volcanoes in the country) [12] as an alternative to offset the carbon footprint derived from the operation of cryptoassets.

I just instructed the president of @LaGeoSV (our state-owned geothermal energy company), to implement a plan to offer facilities for #Bitcoin mining with very cheap energy, 100% clean, 100% renewable, 0 emissions from our volcanoes 🌋” Bukele’s tweet [13]

Many other unforeseen problems

The law approved by the Legislative Assembly of El Salvador obliges all businesses to offer Bitcoin as a payment method, while citizens will be able to pay their taxes in Bitcoin, so public finances will be exposed to sudden devaluations of this cryptocurrency, which has fallen up to 22% in a single day.

But not only public finances are at risk, but also the family budget of Salvadorans, who could see how in a single day their capital can be devalued by up to 20%, something that would not happen with the dollar even in a decade.

The law also establishes that any debt can be converted to Bitcoin. “This puts the banking system at risk, because banks are obliged to receive payment in Bitcoin with all the complexities that this entails,” explains Ricardo Castaneda, an economist at the Central American Institute for Fiscal Studies (ICEFI) in San Salvador in an interview with the Spanish newspaper El País: “Bitcoin is an extremely volatile currency and the way that banks take care of a currency’s volatility is via interest rates. So, it is possible that there could be an increase in interest rates, which would make the debt of Salvadorans more expensive[14].

But undoubtedly the biggest problem arising from the implementation of BITCOIN, is the low capacity of the distributed system to process enough transactions per second, which in the case of MasterCard for example is 45,000 transactions in that period of time, Visa exceeds 65,000, while the BITCOIN averages only 7 transactions in a second, making it inefficient as a payment currency for everyday transactions, especially of low value [15].

In conclusion, although the decision of the President of El Salvador to convert the BITCOIN into legal currency is very mediatic, has a significant impact on the GEEK world, and positions him as a fresh and disruptive Millennial leader; in practice, the decision hides great risks and associated problems, including the massification of criminal activities and subsequent money laundering, the high fluctuation of the currency that will affect citizens’ pockets, the immense energy costs, as well as the inefficiency of the system itself to process multiple transactions per second.

[1] News about Bukele’s decision published in the Spanish newspaper El País

[2] Encyclopedic article on Satoshi Nakamoto

[3] Link to the official website of

[4] CNN article: How does Bitcoin mining work?

[5] News about Bukele’s decision published in the Spanish newspaper el País

[6] Analysis by El País of Spain

[7] BBC report on pipeline ransom in the United States

[8] Article of La República on the decision taken by CHINA

[9] Article of La República on the decision taken by CHINA

[10] Encyclopedic article on El Salvador

[11] Article of the Specialized Portal XATACA

[12] Tweet of Bukele ordering the production of more Geothermal energy

[13] Tweet of Bukele ordering the production of more Geothermal energy

[14] Analysis by El País of Spain

[15] XATACA’s specialized article on Bukele’s decision in El Salvador